Vanuatu blacklisted by EU: Neo-colonialism or justified?

Recently, the small South Pacific island nation of Vanuatu found itself placed on a taxation blacklist by the European Union (EU) along with 14 other low-tax or no-tax jurisdictions. The reasons given by the EU for the blacklisting were that Vanuatu had not made sufficient progress towards meeting the EU’s three criteria of tax transparency, good governance and real economic activity, as well as the existence of a zero corporate tax rate.

The implications for Vanuatu and other blacklisted jurisdictions are still unclear, as the EU has not spelled out exactly what sanctions or other penalties will be applied, or when. The announcement of the blacklist has drawn heavy criticism from various sectors and politicians, including Vanuatu’s Foreign Minister Ralph Reganvanu, who called it “a game when the rules of the game are always changing, the goalposts are always being shifted and there are several different referees”. But it is not just that the EU are being inconsistent in their treatment countries like Vanuatu; they are also being hypocritical and highly selective in what jurisdictions they apply their rules to. The end result of this is that the blacklist loses much of its credibility.

Vanuatu achieved independence from the United Kingdom and France in July 1980. Prior to independence, it was known as the New Hebrides and for much of the 20th century was jointly run by the British and French under a Condominium arrangement. It was during this condominium period that Vanuatu’s status as an offshore financial centre was established, with no personal or corporate income taxes levied to this day. In 2016, the Vanuatu government announced that it was establishing a Revenue Review Committee. The Committee’s mandate was to review the country’s tax and non-tax revenue systems and report back to the government by the end of 2016. The three key areas examined by the review were tax revenue, non-tax revenue and modernisation of Vanuatu’s tax and customs administration. The final report by the Committee recommended the introduction of personal and corporate income tax, and the government subsequently accepted the report and its recommendations in April 2017. To date, the government has not announced when it plans to introduce income tax to Vanuatu, perhaps conscious that a general election is due next year and the potential for it to become a key election issue.

In 2018, Vanuatu signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, as well as the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (CRS MCAA). It was also removed from the Financial Action Task Force grey list as a result of passing a suite of legislation addressing anti-money laundering and countering terrorist financing matters.

So given the progress Vanuatu has made towards transparency and accountability in recent years, why does it now find itself on a list of countries considered “non-cooperative” by the EU? According to Kasim Mohammed Nazeem, press officer of the Delegation of the EU to the Pacific, the EU engaged with each Pacific nation on specific issues. Countries on the list were given a chance to engage with the EU to address any particular issues that the EU had with them. Refusal to engage with the EU resulted in the countries being blacklisted. Vanuatu was moved from the grey to the blacklist along with Aruba, Belize, Dominica, Fiji and Oman.

Nazeem was quoted as saying, “Jurisdictions need to comply with the principles of the EU code of conduct on business taxation, or the OECD’s forum for harmful tax practices.” Willie Rex, Secretariat of the Vanuatu Competent Authority under the Ministry of Finance, believes that if no effort is made by the Vanuatu government to move off the blacklist, the country may face consequences.

Rex mentioned the introduction of income tax as a possible way forward to get off the EU blacklist, despite Vanuatu having an extremely small employed population. The Secretariat also said that the government is looking at other alternatives to income tax, but that somewhere down the line income tax may have to be introduced. The private sector, through the Vanuatu Chamber of Commerce and Industry (VCCI) have come out strongly against the introduction of an income tax in Vanuatu, claiming that it would devastate Vanuatu OFC, which contributes between 2% and 3% to the country’s GDP. Instead, they suggest “modernising” the financial centre by modelling it on more successful OFC’s such as the Cayman Islands, the BVI, Hong Kong and Singapore. Whether this would help remove Vanuatu from the EU blacklist is another question entirely.

You do not have to look very far for evidence that the EU blacklist is both unfair and bad policy. For starters, it applies only to jurisdictions outside the EU, meaning that some of the world’s “worst” tax havens are automatically excluded from the list. According to a report by Oxfam, if the criteria were applied to EU member states, Cyprus, Ireland, Luxembourg, Malta and the Netherlands would all find themselves blacklisted. The hypocrisy inherent in this approach is clearly evident, especially when you consider that the jurisdictions responsible for the vast majority of pass-through activity are missing from the list.

Vanuatu’s OFC makes up less than 0.001% of global OFC activity. According to the Reserve Bank of Vanuatu, in December 2017 total assets held by offshore banks registered in Vanuatu were less than US$80 million with funds on deposit totalling only $58 million. By comparison, the Cayman Islands holds somewhere between $1.5 and $2 trillion in deposits. Vanuatu cannot in all seriousness be viewed as a major risk or contributor to BEPS by the EU when its offshore finance sector is so miniscule.

The EU blacklisting is just the latest in a series of actions taken by the larger OECD countries to force Vanuatu to adopt an income tax regime that is not fit for purpose. While neither government will publicly acknowledge it, Australian advisors attached to Vanuatu’s Ministry of Finance and Economic Management and the Department of Customs and Inland Revenue over the past several years have been working towards an income tax system modelled on the Australian one. A significant number of civil servants have received formal training in Australia on income tax legislation, presumably in preparation for the eventual implementation of an income tax in Vanuatu. Public consultations held by the Revenue Review Committee have been criticised by the private sector as being less of a consultation exercise, and more of a presentation of decisions that had already been made.

One main criticism of the Revenue Review Committee report was the lack of economic analysis – independent or otherwise – of the impact an income tax would have on GDP, employment and inflation. There is also the large administrative burden an income tax system brings with it, that would potentially absorb a large percentage of the revenue collected by an income tax in a country of only 270,000 people – of which only about 9,000 are expected to pay tax based on the system proposed by the RRC. And that is assuming that those taxpayers remain in the country after the introduction of the tax. The pressure for Vanuatu to introduce an income tax is therefore clearly being driven by external forces in a bid to shut down its offshore finance centre.

No one is disputing that the Vanuatu government needs to find new sources of revenue to invest in its chronically underfunded infrastructure, health and education systems. However, serious question marks remain over whether introducing income tax will solve these problems; or merely demonstrate to the world at large that while Vanuatu may have achieved independence from the U.K. and France 39 years ago, it might take a little bit longer to throw off the shackles of colonial attitudes.